What happens when board evaluations are not effective?

Like every company team and employee, it’s essential for a board of directors to regularly evaluate its performance. The UK Corporate Governance Code dictates that these self-evaluations should be ‘formal and rigorous’ annual events and cover not just the board but also individual members. 

Board self-assessments are a critical opportunity to take a step back from daily task lists and ensure all directors can work effectively for the company. They provide a forum for directors to air issues, remove strategic obstacles and reset expectations to get everyone back on the same page. Effective evaluations will also identify opportunities to adapt the board to improve performance.

The barriers to an effective board evaluation

While board assessments are increasing in uptake and scope, their effectiveness has mixed results. 

One reason for this is the compliance-orientated approach adopted by some organisations. For example, board evaluations often start with a checklist of items and standards that companies must meet by law. This review of board structures and processes is helpful, but a huge opportunity has been missed if used to block deeper examination or treated as a box-ticking exercise.

The second and harder element of the review is the contribution of individual directors and how the group dynamics play out. For this to be effective, strong leadership is required to progress the process and keep all parties on board. A 2017 Harvard Business Review study found that only a quarter of directors believe that their leadership is very effective in giving direct, personal, and constructive feedback to fellow directors. This could be seen as a barrier to effective board evaluations.

However, there are signs of change. An EY study revealed that 53% of 2021 Fortune 100 proxy filers performed individual director evaluations along with board and committee evaluations. There is an upwards trend from 24% in 2018 and a sure sign that companies see benefits in detailed evaluations.

What happens when evaluations are not effective?

Having said that, individual director assessments aren’t the silver bullet for this problem. Is a director with a five-year tenure going to find their performance lacking? Unlikely. Some insiders suggest that directors can see over-rating board effectiveness as a vote of ‘support’ in its members. A misguided notion that proves when evaluations are ineffective or non-existent, it’s easy for the board to slip into general self-interest and a lack of competency. 

The same Harvard Business Review study found a general dissatisfaction with boardroom dynamics. Only two-thirds strongly believed that their board is open to new points of view, and just half thought that the board utilised the skills of all its members. In addition, 46% believed there was ‘a board within a board’ - a subset of directors with more significant influence on board decisions. Most worryingly, “the typical director believes that at least one fellow director should be removed from their board because the individual is not effective.”

These issues should all be addressed during the board evaluation process.

Getting the most from your board evaluation

1. Agree on the objectives

To gain the commitment from all board members, it’s essential to communicate and agree on the purpose of the evaluation. If leadership is clear and honest about the objectives, directors are more likely to commit time and honest feedback. On the other hand, a self-evaluation is unlikely to be effective if there is mistrust of the true purpose or board members are not candid.

2. Look outwards

An emerging practice amongst boards in the US is to include senior management in the evaluation. Getting input from the general counsel, CFOs, or the Head of HR can widen the perspective on the board’s effectiveness. In addition, as regular board observers, they have oversight on how decisions are reached and then how that is communicated and implemented in the company.

3. Review the results together

There’s no point in reviewing your board if the results are ignored, and no changes are made. Once collated, results are often first reviewed by the nominating or governance committee and independent chair or lead director before being presented to the entire board. It’s often also helpful to give a preview to leadership and specific individuals before sensitive feedback is delivered.

Problem or improvement areas should have been identified (no board is perfect), and an action plan should be developed and implemented. All board members should agree and commit to a timeline and regular progress updates to ensure follow-through before the next annual evaluation.

4. Don’t just leave it to once a year.

According to EY, nearly a quarter of Fortune 100 companies are addressing certain evaluation matters ongoing. Reviewing problem areas doesn’t need to wait for that specific annual slot, nor should it. Instead, proactively spot and address emerging issues to avoid spiralling into greater challenges further down the line. 

Some boards use ‘trigger’ events, such as a CEO, to spark a review throughout the year. These assessments have a clear purpose - to help the CEO gain insight into the board dynamics to produce fruitful relationships with board members.

Are you happy with the way your board reviews its performance? How could it be improved? We'd be very interested in hearing from you below. Thanks for reading.